Getting Personal
Buying gold
Question: What is the best way to add some gold to your investment portfolio? It is best to buy shares in a mutual fund, or just buy gold? Andrew, New York, NY
Answer: Gold has been on a tear lately. The price of the precious metal meandered for much of the summer, and then it moved sharply up in September. Gold futures closed at a record high today of $1,004.90 a troy ounce. (That's a "nominal" price record; adjusted for inflation gold reached a peak of more than $2,200 in early 1980.) There are all kinds of theories being batted around the world's largest chat room--the global capital markets--for the run up in gold. The most popular explanations revolve around the prospect of surging inflation in the U.S., worries about global deflation, buying by the Chinese central bank, falling mining production, a weak dollar--and all of the above.
If you're optimistic about gold, I would be wary about buying the actual metal. The metal is volatile. Gold doesn't pay dividends. It doesn't create cash flow. It costs you to store it.
There are intriguing alternatives. There are some exchange traded funds (ETFs) that are a cost-effective option for the individual investor, such as the SPDR Gold Shares ETF. A number of mutual funds focus on owning the precious metal and mining company shares, like the Van Eck International Investors Gold. Another approach is shown by the mutual fund First Eagle Global. A small percentage of its portfolio is invested in gold bullion. It acts like an insurance policy. When the equity markets go down, the price of gold is supposed to go up, cushioning the impact on the portfolio's value.
By the way, if your nervous about inflation here in the U.S. I still prefer Treasury bills and Treasury Inflation Protected Securities. These are investments that preserve capital and make you some money. No one will get rich with these securities, but the value of a dollar will be preserved. Still, if you want to invest a small percentage of your portfolio in gold, I'd investigate the mutual fund and ETF options at a website like Morningstar.com.
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Comments (4)
September 12, 2009 5:47 AM PT
The author of this piece has made some misleading statements.
He said; "If you're optimistic about gold, I would be wary about buying the actual metal. The metal is volatile. It costs you to store it."
Year over year since 2000, the price of gold has been rising. How is that "volatile?" If you store it in your own safe, how does that cost you?
He said; "Another approach is shown by the mutual fund First Eagle Global. A small percentage of its portfolio is invested in gold bullion. It acts like an insurance policy. When the equity markets go down, the price of gold is supposed to go up, cushioning the impact on the portfolio's value."
Equities were more volatile than the physical metal. Last year when the overall stock market crashed, gold mining stocks got hit hard as well. Physical gold, while getting hit midyear, recovered and finished the year positive. As a matter of fact, First Eagle's Global Fund is down 14.4% while their Gold Fund is down only 8.3%. Physical Gold more volatile?
I wrote a free white paper on investing in gold. It can be found at http://fedupbook.com/whitepaper
Disclosure: I don't sell gold. I just write about it.
September 12, 2009 2:52 PM PT
"If you store it in your own safe, how does that cost you?"
You would store a significant amount of gold in your home and not insure it? I don't think I will heed your investing advice.
September 15, 2009 7:23 PM PT
Jeff,
Depends on the gold you have in storage. Have you looked into insurance polices and how much they actually insure or even if they insure it at all? State Farm for example dosen't even insure gold bars. For gold coins, they require that you list each coin separately as to its value verified by an appraiser or coin dealer, include the date of the coin and keep your insurance agent updated at least annually when there are increases in value of your gold.
Most people don't know what is involved in storing their gold and probably think they are fully covered when they may not be at all...so the insurance is a waste of money if they their gold stolen. In my book I cover this in detail. You don't have to buy it since you know everything there is to know about investing in gold already.
September 14, 2009 4:49 AM PT
There are options to buy physical gold without a storage fee, you can find out more at www.europac.net (a brokerage that I use).
Also, there are several different ways to buy gold, silver, etc. In my opinion, an ETF is a good option, but I think of it as a last resort. Reason being you have to trust the fund actually holds the amount of gold or silver they claim.
I definitely recommend reading Peter Schiff's "Little Book of Bull Moves in Bear Markets" to learn more.